What is National Pension Scheme, Benefits, Eligibility

The Central Government’s National Pension Scheme is a program for social security. Employees from the public, private, and even unorganized sectors, except those in the armed forces, are eligible for this pension system. The program encourages participants to contribute to a pension account regularly while they are still employed. A specific portion of the corpus may be withdrawn by subscribers after retirement. If you have an NPS account, you will get the remaining sum as a monthly pension after you retire.

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The government-sponsored pension system known as the National Pension Scheme (NPS) was made available to public employees in January 2004. Accessibility for all parts was achieved in 2009. A subscriber can contribute regularly to a pension account while still employed, take a lump-sum distribution from the corpus, and use the remaining funds to buy an annuity to guarantee a constant income in retirement.

Objectives of Implementing NPS

1. An important consideration during financial planning is building a sizable corpus for one’s retirement period.
2. It not only enables people to meet their financial obligations, but it also makes it possible for them to live their post-retirement lives as comfortably as possible.
3. The Indian government, therefore, introduced programs like the National Pension System, or NPS, to address this worry about the expanding senior citizen population in the nation.
4. The program encourages systematic saving while one is employed, fostering personal financial responsibility and future planning.

How to Apply Online for an NPS Account

Through the online portal NPS, anyone can register and get a subscription to the National Pension System. The step-by-step instructions are given below to register for the program:

• Visit the eNPS portal on the National Pension System’s official website.
• Select the Individual Subscriber or Corporate Subscriber option that best fits your needs.
• Determine your appropriate residency status. The choices are “Indian citizen” and “NRI.”
• Choose either a Tier I account type or both, as the former is required for long-term savings.
• Fill up your PAN details and choose the bank of your choice. For KYC verification, it is advisable to choose a POP with whom you already have a relationship, such as savings, current, demat, or account, as the chosen POP will complete it.
• Upload your PAN card’s scanned image along with a check cancellation.
• After that, upload your scanned signature and photo in the same size and format as before.
• After being forwarded to the payment gateway, continue to pay the necessary fees using online banking.
• Once you pay the fees, your Permanent Retirement Account Number will be generated, and you will get to know your PRAN number.

Types of NPS Accounts

In terms of account types, there are mainly two most common types of NPS accounts:

1. Tier I: This is the default account, which means it is compulsory for all employees. In this type of account, withdrawals are not permitted.
2. Tier II: This type of account is opened voluntarily, which means it is optional to open it. You can withdraw your money in case of an emergency from this account.

Advantages of Opting For This Scheme

1- Returns/Interest

The money that is invested in the NPS provides a significantly higher return than those of other conventional tax-saving investments, such as the PPF, as a portion of the NPS is invested in stocks, which may not give guaranteed returns but are much higher. 

This NPS scheme has been in circulation for more than ten years, and it has been benefiting its subscribers with annualized returns of 9% to 12%. If you find yourself unsatisfied with the developments of the fund management, NPS allows you the option of changing your fund managers.

2- Risk Evaluation

At present, the investment in equity from the National Pension Scheme is limited to between 75% and 50%. The ceiling for government workers is set at 50%. The equity component will decrease by 2.5% annually in the range specified starting in the year the investor turns 50. However, the maximum limit on equity investment is set at 50% for investors who are 60 years of age or older. 

As a result, there remains a good balance between the involved risk and the received return, which is necessary to stabilize the interest of investors. This ultimately protects the majority of investors to some extent from the volatility of the equity market. NPS has a better earning scope for the NPS account holder than other fixed-income plans.

3- Tax Advantages for Self-Contributions by Employees

There are many tax-related advantages available to those employees who make NPS contributions.

• The most important advantage of opting for the NPS is that there is tax relaxation of up to 10% of basic pay and DA under Section 80 CCD(1), and its maximum limit is up to Rs. 1.50 lakh under Section 80 CCE.
• The other benefit of tax deduction is that after the overall maximum of Rs. 1.50 lakh under Section 80CCE, there is an additional tax deduction of up to Rs. 50,000 under Section 80 CCD (1B).

4- Tax Benefit For Employees On Employer Contributions:

The employee is given a tax relaxation of up to 10% of the basic pay and DA on the basic salary, which is contributed by the employer under Section 80 CCD(2), in addition to the Rs. 1.50 lakh limit given by Section 80CCE.

5- Tax Advantages For Independent Employees:

Some tax advantages are also available to self-employed people who make NPS contributions by themselves:

• A self-employed person is entitled to a tax deduction of up to 20% of gross income under Section 80 CCD (1), with a maximum deduction of Rs. 1.50 lakh allowed by Section 80 CCE.
• With the maximum deduction of Rs. 1.50 lakh under Section 80CCE, there is one more tax deduction permissible, which is of up to Rs. 50,000 under Section 80 CCD (1B).

6- Rules for Withdrawals After 60

In the NPS plan, the retiree is not permitted to take out his whole account balance at retirement. To receive a regular annuity from the PFRDA-registered insurance company, it is necessary to set aside at least 40% of the total accrued fund under this scheme. Taxes are not imposed on the rest of the 60% of the accumulated fund.

7- Early Withdrawals and Exit Regulations:

To fulfill the requirement of a pension plan after retirement, one should invest in the National Pension Scheme until he reaches the age of 60. However, partial withdrawals can be made after three years from the account’s opening date. The maximum amount that subscribers may withdraw from their contributions is 25%. 

The investor can make a premature withdrawal in certain situations, such as paying a child’s education fees, buying a home, or in the case of a medical emergency. During the entire tenure of the investment, subscribers have the option of withdrawing money up to three times at intervals of five years. 

Only the investment in a Tier I account can be used for withdrawing money, according to the rulings of the NPS. The investments in the Tier II accounts are not permitted for withdrawal.

8- It is Optional:

Anytime during a fiscal year, a subscriber to the NPS program may contribute, and he or she may also alter the amount they wish to invest each year.

9- Provides Flexibility

The flexibility of the National Pension Scheme allows users to pick their investment and pension fund options while watching their money increase.

10- It is Simple: 

Any Point of Presence (POP) or the eNPS website (https://enps.nsld.com/eNPS/) can be used by subscribers to open an NPS account.

11- Regulation Applies.

The task of managing and overseeing the NPS program has been allotted to the Pension Fund Regulatory and Development Authority of India (PPFRDA). This is in charge of the NPS program. 

It also provides subscribers with transparency and reliability through routine monitoring and open investment standards.

13- Rules for Equity Allocation:

The investments made in NPS are different. The equity allocation guidelines say that investors are allowed to invest only up to 50% of their money in stocks. There are two investment choices available for investors: active choice and auto choice. 

In active choice, investors have the freedom to select their funds and decide their investments according to their risk tolerance, power, and convenience. While in auto-choice, investors have no option to make investments. It is all based on the risk profile and age of the investors.

Wrapping up

The NPS program is most beneficial for those who work in the private sector and want a regular pension after retirement. The program has many advantages, including tax advantages under Sections 80C and 80CCD, and it can be transferred from one job to another and also from one place to another.